There are mounting apprehensions surrounding a looming global debt crisis, a consequence of the substantial escalation in public and private debt levels worldwide. Developed and developing nations have witnessed a marked surge in their debt burdens, as governments resort to increased borrowing to fund economic stimulus packages, infrastructure projects, and social programs.
Regrettably, the COVID-19 pandemic has played a pivotal role in exacerbating the global debt predicament. Extensive fiscal measures implemented by nations to address the economic fallout have resulted in heightened debt levels. According to a recent statement by Tim Adams, CEO of the Institute of International Finance (IIF) at the World Economic Forum in Davos, the world faces a huge “fiscal problem,” with global debt projected to reach $310 trillion by the end of 2023. Adams remarked, “We have a debt problem globally. We have the highest levels of debt in a nonwar period in modern history, and it’s at the corporate, household, sovereign, sub-sovereign levels.”
While nations grapple to rectify their debt situations, the central banks of many countries have embraced a low-interest-rate policy to spur economic growth. While this approach has aided in managing debt servicing costs, it has concurrently fostered borrowing, contributing to an overall escalation in debt, particularly in emerging markets.
During a panel session titled “Pulling debt back from the brink” on the second day of the ongoing World Economic Forum, Laura Alfaro, the Warren Alpert Professor of Business Administration at Harvard Business School, underscored the necessity to proceed cautiously in addressing the debt challenges of emerging markets due to their inherent heterogeneity. She noted, “Broadly, we have two significant categories within the emerging markets. On one side are those who have maintained access to private markets, and on the other hand, are those who do not have that access and continue to borrow from multilateral and bilaterals.” Interestingly, as nations with access to the private market make efforts or demonstrate a willingness to repay loans, the debt-to-GDP ratio in those countries has notably decreased, she added.
A widespread debt crisis has the potential to unleash cascading effects on the global economy, precipitating reduced investor confidence, financial market instability, and a worldwide deceleration in economic growth. As interest rates climb or economic conditions deteriorate, servicing substantial debt amounts becomes increasingly formidable. This predicament may lead countries to grapple with meeting their debt obligations, exposing them to potential default risks.
In many emerging economies, especially in Africa, effective debt management has proven elusive for numerous countries. Consequently, concerns have arisen among economists and policymakers regarding the sustainability of prevailing debt levels. Ineffectual debt management has triggered fiscal crises and economic instability in most of these economies.
During the panel session, Wale Edun, Nigeria’s Minister of Finance and Coordinating Minister of the Economy, representing Nigeria’s Vice President Kashim Shettima, highlighted the persistent elevation of interest rates, suggesting a prolonged period of such conditions due to efforts in the developed world to combat inflation. Edun asserted, “Therefore, the world cannot look to debt as a means of financing growth, development, and industrialization … The answer has to be domestic resource mobilization, fiscal prudence, and better expenditure management.”
With the escalating global debt levels, experts note the concerning performance of non-performing loans on a global scale. Vera Songwe, Founder and Chair of the Liquidity and Sustainability Facility, pointed out, “Household debts in Switzerland are the highest they have ever been in 30 years. In Sweden and Denmark, it’s almost 128% to 221% debt to income levels on the household side.” However, she also mentioned that on the banking side, non-performing loans stand at approximately 2.2%, demonstrating the effectiveness of supervisory and regulatory measures implemented since 2008 in Europe to ensure financial sustainability and system soundness.
Songwe further emphasized that nations with robust infrastructure around debt issuances may be better equipped to manage some of the pressures associated with debt.
As the world contends with an impending debt problem, it is imperative to recognize the dynamic nature of economic conditions, subject to rapid changes. While governments and international institutions diligently monitor and respond to these challenges, countries in emerging economies are encouraged to explore home-grown solutions that can aid in addressing their debt problems.